IRD Arrears

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An employer may receive a notice from Inland Revenue requiring them to deduct tax, student loan arrears or family tax credit over payments from an employee‟s wage (a section 157 notice). The notice will explain how to calculate the required amounts.  Child support payments must be deducted before tax and student loan arrears and Working for Family Tax Credit over-payments. Note: This is a different situation from the student loan process for significant under-deductions, where the employer would be instructed to use the student loan SLCIR repayment code.

The usual deduction notice is for the lesser amount of - 10% of the total arrears or 20% of the gross wages (with a minimum of $10 per week).

In some non-standard instances, the commissioner will issue a deduction notice for a single amount or for regular set amount deductions. They may also advise to change the amount to be deducted from a standard deduction notice to a different amount. This is what your client has received for their employee.

If it’s a deduction order like the one above, the amount of the deductions must still not exceed the 10% of arrears or 20% of the gross wages figure, as per the standard deduction letters (reference s157 (3) TAA 1994).

Most of the non-standard letters will have a total amount of debt and the number of deductions to be made, but some will also not have an end date. Those will need to be made until further notice.

In regards to the details to supply Inland Revenue with the payments, the standard compulsory deduction order notice has the payment details on the second page. It advises the details if the payment is being made, and that the employer can use those or make copies of an attached payment slip. In the non-standard deduction notices they may not have these details.

An example of that second page for standard deductions is attached below.

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How do I set this up in FlexiTime?

If IRD have asked for regular deductions, use the IRD tab on the Employee's Pay Deductions tab and FlexiTime will automatically calculate the lesser of 10% of the total arrears or 20% of the gross wages (with a minimum of $10 per week).  

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Original Default Sum

The original amount owing, as advised by the IRD.

Balance Owing

When entering the balance on receipt of the notice, this will match the Original Default Sum. The balance will then reduce with each deduction made from the employee's wages, and once it reaches zero the deductions will cease.

Tax Type

The tax type for the arrears payment.  This will be included on the Employers’ Monthly Schedule (IR 348).   Unless otherwise specified in the arrears notice,  the tax type is the Code shown on the bank line and is usually ARR. 

Tax Period

The tax period that the arrears are related to, as notified by IRD.  If IRD does not specify a tax period,  leave this blank.   

 

If IRD have asked for a fixed amount which is not equivalent to the lesser of 10% of the total arrears or 20% of the gross wages, you need to create a new Post-Tax Deductions pay code and copy the pay code bank details from the existing IRD Arrears pay code. See the Maintaining Pay Codes article for more information.

Add this pay code to the employee's Default Paycodes, specifying the amount to be deducted from each pay. Use Pay Code Balances to specify the total amount to be repaid.

Unlike other IRD payments, arrears will be paid when the employee is paid.     Usually the employee is paying interest or penalties on the outstanding amount owed, so it is best to get the money to IRD as soon as possible in order to reduce the outstanding debt. 

 

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